[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

New York City leads, in the short run (when supply is inelastic), to an increase in
rents, a consequence again of the law of supply and demand—one that will please
landlords and leave tenants angry.
In each of these cases, pressure from those who did not like the outcome of
supply and demand has led government to act. The price of oil and natural gas was,
at one time, regulated; minimum wage laws set a minimum limit on what employers
can pay, even if the workers are willing to work for less; and rent control laws
limit what landlords can charge. The concerns behind these interferences with the
market are understandable, but the agitation for government action is based on
two errors.
First, someone (or some group) was assigned responsibility for the change: the
oil price rises were blamed on the oil companies, low wages on the employer, and
rent increases on the landlord. As already explained, economists emphasize the role
of anonymous market forces in determining these prices. After all, if landlords or
oil companies are basically the same people today as they were last week, there
must be some reason why they started charging different prices this week. To be
sure, sometimes the price increase does result from producers’ collusion. That was
the case in 1973, when the oil-exporting countries got together to raise the price of
oil. But far more often, the explanation lies in the market—as in 2004, when faster
economic growth in the United States, Japan, and China led to an increase in the
demand for oil that pushed up oil prices.
The second error is to forget that as powerful as governments may be, they can
no more repeal the law of supply and demand than they can repeal the law of gravity.
When they interfere with its workings, the forces of supply and demand will
remain out of balance, with either excess supply or excess demand. Surpluses and
shortages create problems of their own. Indeed, if shortages develop, individuals
may find that instead of paying the high prices that triggered the government
intervention, they cannot obtain the desired good at any price.
Two straightforward examples of government attempts to control the market
are price ceilings, which impose a maximum price that can be charged for a product,
and price floors, which impose a minimum price. Rent control laws are price
ceilings, and minimum wage laws and agricultural price supports are price floors.
A closer look at each will help highlight the perils of interfering with the law of supply
and demand.
PRICE CEILINGS
Price ceilings—setting a maximum charge—are always tempting to governments
because they seem an easy way to ensure that everyone will be able to afford a particular
product. If the price ceiling is effective—that is, it is below the market clearing
price—the result is to create shortages at the controlled price. People want to buy
more of a good than producers want to sell. Those who can buy at the cheaper price
benefit; producers and those unable to buy suffer.
Cities from San Francisco to New York have instituted controls on rents in the
hopes of making housing more affordable. The effect of rent control laws—setting
the maximum rent that a landlord can charge for a one-bedroom apartment,
INTERFERING WITH THE LAW OF SUPPLY AND DEMAND ∂ 91